Bio-Techne Corporation (TECH) Earnings Call Transcript & Summary

All right. I guess the music is off and that is our queue. So thank you all for joining us today for our conversation. We'll kick things off and then you'll do most of talking to tell this incredible story for us. But for everybody, I'm Jack Cassel, Senior Vice President with NASDAQ. And I'm excited for our discussion today with the Chief Executive Officer, Kim Kelderman; and Chief Financial Officer, Jim Hippel, for Bio-Techne. So maybe for the audience, let's level set with just an overview on the business.

Thank you, Jack, first of all, for having us and hosting the conference. We're very excited, and we are 15 years in the making. So Bio-Techne itself, 50 years old. However, we say old, the core business that we have created over these 50 years is 7,000 proteins and 400,000 antibodies, basically lego blocks for any life science tools, laboratory that wants to make progress. So we're deeply entrenched in everything research really. But over the last 10 years or so, we've really doubled down on trying to utilize these components into faster-growing application areas. And we have 4 application areas that we focused on. One of them is cell therapy. Basically, everything to do with growing cells, immune cells or regenerative cells to cure diseases. And for that, you need all these core components I mentioned earlier, and we also have a bioreactor to help grow these cells processes. The second area we focused on is proteomics, proteomic analysis. We know that has been a heavily debated area for a decade, but we feel that the market and the capability of generating data is now there to really support proteomic. I would say. It's a business that we built through organic as well as inorganic activity. Third dimension is spatial biology where you can interrogate tissue and see what the cells are doing amongst each other and whether your therapies are working, very important in going forward research. As well as then last but not least, a molecular diagnostics business, which basically has the capability to interrogate very hard to find genes and also hard to read genes, where NGS struggles. And that's what we're really focused on. So we created a nice little niche there. All 4 of those areas really utilize our core reagents and are in fast-growing markets that are aligned with the mega trends as we see them in life science tools.

Okay. We're going to talk a bit about those trends, so I appreciate that. But you recently announced your Q1 '26 results. Is there anything specific you'd like to highlight in those?

Yes, a couple of strong dynamics in there. One was that we have built the cell therapy business, which has been a rapidly growing. And with that, of course, also relatively lumpy. We had a 60% growth, 90% growth quarters last year. This year, we had the great news that 2 of our larger customers have obtained Fast Track approval by the FDA. And that means that they can basically get to an approval faster and that they will have to reduce the number -- can reduce the number of clinical patients that they run, and they had ordered enough for them to complete their clinical stages. That really gives us an air pocket if it comes to the revenue for several quarters from those customers. However, underneath, we have really nicely added customers to our pipeline and added customers to a level of 700 or so in total right now. Another couple of real good dynamics underneath though, which was that large pharma continue to grow double digits for us, which was the third consecutive quarter. We had China for the second time in positive growth territory, second time, meaning 2 consecutive quarters. Our protein analysis instruments continue to grow very nicely and the pull-through of the reagent still in double digits, 10 out of 12 quarters. And then last but not least, the spatial biology business also continue to accelerate growth now back into positive growth territory with double-digit bookings. Margins were good. So we had kind of forecasted 20% on the bottom line, ended up being 29.9%, so 90 basis points higher, which is good. We've done quite some good work around efficiencies and around operational footprint and organizational structure. So all that worked out really, really nicely. And that set up the quarter with a couple of positive underlying trends and, of course, a temporal revenue air pocket in the cell therapy customers that get their Fast Track approval.

Okay. Shifting gears a bit, let's just discuss some of the end markets for Bio-Techne that you serve, starting with the biopharma market. What is your exposure to that end market? And what are the trends you're seeing with those specific customers?

So biopharma in aggregate is about 50% of our revenue. So it's large end market. We split it out between large pharma and biotech. They typically have different trends and drivers. Large pharma is 30% of that 50%. And that has really done nicely for us over the last 3 quarters. As I mentioned, double-digit growth 3x in a row. We were somewhat worried last couple of quarters when there -- was rhetoric about high tariffs on medication and that possibly would create a reaction in large pharma. But large pharma has reacted relatively quickly and negotiated a path forward, so continued its strength. Biotech is very much related -- sensitive to funding. And overall, the fiscal -- the calendar year funding was down mid-teens year-over-year and that definitely put pressure on that end market and resulted in high single-digit negative decline, if you will, negative growth. And there, we see definitely some improvement. First of all, some M&A deals. Lower interest rates is always good for that end market. And we feel that there is some momentum in the funding as well. The last 3 months, funding was definitely significantly positive year-over-year and those are good indicators that it is stabilizing and hopefully in the balance of the year, accelerating again. So those are the 2 trends in the biopharma market.

Sticking with the markets you serve or I guess the end markets, another large one, it seems is academic research. So maybe you can help the audience with how large is that end market? What is that geographical split? And what are some of the trends you're seeing there?

Yes. Academic research redeemed very -- is important, not only because it's for us, 20% of our revenues, but also because where as a scientist, you learn your methods and the instrument software as well as the [ cadence ] that you use. It's important to be there because they will branch off into biotech and into large pharma and then of course, bring some of that experience with them. So it's an important market for us. 12% of our revenues comes out of U.S. academic in the balance. The 8% comes out of Europe academics. Europe academics has been mid-single-digit grower. That's where we expect it to be and has been relatively stable. U.S., however, since February, really, it has been very turbulent, right? There was talk about budget cuts and certainly a shift in which type of projects get funded by the NIH. And that created some uncertainty in the market. So people definitely started reacting to it and reduce their spend. We do feel overall that there's still things to be negotiated, right? And there's not a final budget yet. We do feel that, overall, there's always -- there's typically a drive to have a good budget for academics is bipartisan support who -- to kind of make sure that the economics are in good shape in the country in the U.S. But it's not there yet. So we'll have to see how that evolves. Two certainties we have. One is that we can see which programs are getting funded, and that has definitely shifted away from infectious diseases and from immunization towards traditional diseases such as neurology as well as oncology and weight management. So those areas definitely more aligned with our product portfolio. So that's a good thing. And the other certainty we have is that as of February, our comparables will look a lot better and something that also will help our overall growth numbers again. And yes, that's the dynamic around academics.

Okay. Previously, you had mentioned China, maybe we'll stay there for a second on kind of the trends you're seeing in that market as well as your outlook for that market going forward?

Yes. China, obviously, historically, over the last 10 years, very important growth driver for us. At the peak, they were 10% of our revenues, right now around 8% of the revenues. They, of course, saw big out flux of international business activity in the country. Definitely not all green yet. There are definitely some other problems to chew through if you think about real estate market, et cetera. However, after the COVID debacle, where there was really not a good response from China for the Chinese people. There was increased sensitivity around life sciences and improved funding levels and definitely a doubling down in novel modalities. And if you think about -- of course, they're not going to catch up on 50 years of small molecule research that we've done in Europe and the U.S. However, the new modalities in cell and gene therapies are very interesting to leapfrog some of it. And China is technically taking that bull by the horns and has pushed it forward relatively quickly. And if you now see that there are quite some M&A deals where large pharma has like in-license some of these technologies. And that creates an environment where there's heightened activity. So there is foreign currency flowing into China again, and there is an exit strategy. So these projects are definitely picking up again in the CRO market as well as biotech activity is increasing. That's why we were not surprised to see a back to positive growth Q4, fiscal Q4 for us. Even though we were worried that there was some -- maybe some prebuying because there was a relatively large tariff deadline looming. So we were worried that, that was a symptom of that. But then our Q1, which was after this tariff deadline expiring was in the black just as well. And I think that's a testament to overall activity level improving. We think it will continue to accelerate. It will -- it might not be the activity level as it was 5, 10 years ago. But we do believe that it will be north of our average growth as a company and that it will be a leading region if it comes to growth. And we think mid-teens, mid-high teens would be a good indicator -- expectation for us in China.

Okay. Now Bio-Techne's had several product launches over the last year or so. Are there any specific that you'd like to highlight?

Yes. It's a very good question. We basically spent a little over 8% of our revenues back into R&D. We feel that innovation -- organic innovation is important to long term, be able to compete. It's obviously an industry on the move, right? So we've got places to go. And we have basically innovated in the core as well as in all 4 growth verticals. In the core, you can see that we've pushed forward the protein design through utilization of AI to make them hypersensitive or to make them more heat stable. And that's nice because now researchers have these high-powered hyperactivity proteins but they're also patentable because they're not available in nature. So that's a very interesting look. In cell therapy, we have created a form factor of we call it ProPaks, that's basically little bags of proteins or cytokines in certain quantities and in certain dilutions. So that way, there is a lesser chance of mistake, operator mistake as well as a smaller chance of contamination. That's an important form factor for cell therapy. So that way, we can actually attach more of our reagents into the processes related to cell therapy. Protein analysis, the next business unit there. We have launched Leo, which is a very high volume, 100 capillaries, 3-hour run rates with 24 targets per capillary. So a big machine for large pharma, and it's really finding some good traction and obviously has very high pull-through and reagents. So that was a very nice innovation that definitely beat our expectations. In spatial biology we have rolled out a multi-omics method that you can use on our insulin COMET from Lunaphore, which is an acquisition out of Switzerland, we did a couple of years ago and pull through high-quality reagents on the RNA as well as on the protein side. And this last quarter, we launched on protein-protein interaction. So then you can actually see what the interactions are between proteins. And that's a real novel modality that none of our competitors really offers in a special setup as we have. And then last but not least, in the molecular diagnostics. There, we have launched a ESR1 breast cancer test for breast cancer resistance, treatment resistance. And with that test, if you do it on the right time and you swap the patient to a new treatment, if you do that on the right time using this diagnostic, you can double the life expectancy of a patient, so definitely a significant impact. And we have launched a collaboration with Oxford Nanopore out of the U.K. here, and they have long-read sequencing methods, which really enabled a nice panel of inherited diseases, so that also a product that we distribute. So these are all the innovations, it's very active.

A lot. I love that. You mentioned earlier in reference to the earnings call that 2 of your cell therapy patients had received the Fast Track designation. You had also mentioned that you expected this to be a near-term headwind, but realistically, an intermediate term positive. Can you explain that?

Yes. As I mentioned, the Fast Track is obviously a designation that you receive if you have a therapy that's going to have a significant impact on health and that's true for U.S. and Europe. It also is an indication of interest and that there is going to be interest in marketing such cell therapies. In the past, some of the cell therapies were really novel and mind boggling as to what the impact could be, but they're not always scalable and certainly not always affordable. And I think these 2 fast tracks are definitely related to something that can be broadly applicable, and that is important for us because that will drive volume longer term. And we think that these customers would be, 5 years in, they could be $40 million, $50 million GMP protein customers each and peak revenue, 10, 15 years in, you could think of doubling that over time. So those could be substantial customers and obviously, very important to us that there is a recognition of these cell therapies and that there's also a commercialization example and that we can support these customers making a significant impact on the health of the different countries.

Okay. Sticking with cell therapy, you own 20% of Wilson Wolf and plan to acquire the remaining business by the end of, I believe, calendar '27. Can you share a bit of how that fits with the portfolio?

Yes. So Wilson Wolf is a company that owns a product called a GRx. It comes in different sizes. But basically, it's a container, a small disposable container in which you can add all of the reagents that a certain cell population would need to multiply. And the nifty part of it is that the bottom of it has a permeable -- for oxygen permeable floor. That means that cells usually sit at the bottom. All the food ingredients of small molecules, everything they need in the broth sits on top of them. And then from underneath, they can get this oxygen supply. And there, with this nifty device can really be scalable. So you put 11 of those in a, let's say, mini bar size incubator. It's cheap, affordable. So therefore, more applicable in many countries. And what you do there is you utilize this GRx to do your clinicals and eventually commercialize the therapy. And as a reagent manufacturer and having our core, we are very interested in having that in our portfolio because we can attach all our high-margin reagents into this incubator, which is true innovation. So that's how the synergy works, and that's why we're excited about this acquisition.

Okay. Let's move on to the protein analytical instrumental business. It's a mouthful, I will say. What are the offerings here? And where are you in terms of market penetration?

I think overall, it's -- the protein analytics for us, the markets we address is about a $3 billion market. Right now, we are on average with the 3 platforms, around 10% market penetration. So there's still plenty of headspace, and I really like that we are having real good market share gains, and you can see that from our growth numbers. And we're not kept out at any time soon. So that's going to be a long-term mid-teens growing business with very nice pull-through on the reagents. There are 3 platforms in there, and I won't go through each different one. But basically, they address very traditional manual processes such as Western Blot or ELISA, that are entrenched in laboratories but are hard if it comes to doing them manually, but they're also not very consistent and they don't have actual data coming off of them because they're not quantitative. And our solutions are per definition addressing these broader processes. They do it in a very simple way, repeatable way. And basically, that created a business where there's good data, very reproducible data coming off these instruments because we utilize very nifty cartridges that have all the capillaries and all the intricacies in there so that the customer doesn't have to deal with these intricacies and it makes it simple and quantifiable.

Okay. For the sake of time, just shifting gears a bit to your outlook for fiscal '26. Are you still anticipating single-digit growth for the year? And what are the primary assumptions behind that?

Maybe I'll jump on to this 1 here. So before I get to the fiscal year as a reminder, we have a June fiscal year. So if they think is mid-calendar year when we talk about our end of the year. But to kind of level set our expectations on more of a long-term perspective. Life Science [ to close with the pillar of ] life science tools, 30-plus years has been overall mid-single-digit kind of market grower. And with the growth verticals that Kim spoke to, we anticipate -- our entitlement is a double-digit growth company in a normalized end market environment. And our history has shown that to be true in more normalized markets as well. So that to us is our entitlement as we think about where -- when we get back to "normal". But for that to happen, we have to get all of our end markets back to normal. And as Kim talked about, 1 of the 3 is in large pharma, which is important, but the other 2 need to follow biotech and academic. And they've been pressured because of the administrative change and following COVID, they called the COVID hangover and so forth. And it looks like right now, the good news is that there's some green shoots ahead that those things are behind us. And now it's not so much about how much worse can it get, but when does the recovery start and how does it start. And as Kim talked about, we're starting to see some green shoots in biotech with the funding coming back the last 4 or 5 months year-over-year. We see hopefully, some resolution to the U.S. academic. NIH budgets where both houses of Congress have now narrowed it down to more of a flat budget as opposed to 20% or 40% cuts, which was threatened back in February. But it will probably take another 4 or 5 months for -- at least 3 or 4 months for it to kind of get, I mean, approved by the Congress and then ultimately see how it's implemented by the administration. So by the time we get to midyear calendar '26 or the end of our fiscal year, we're hopeful that the academic markets will start to return back to a more normalized buying pattern. And as long as the biotech funding continues to increase, there's usually a 2- to 3-quarter lag between funding and spending. That also lines up well with the start of our fiscal year '27 or call it, back half of calendar 2026 to have these headwinds behind us and the markets return back to normal. Between now and then, though, the markets are stabilizing. Well pharma is already there in terms of growth. And we believe that biotech and academic won't get any worse from here and will start to stabilize. And we've proven time and time again that our growth vectors, they outperformed the market in down markets. But as the market stabilize, they outperform even more. And when markets are stronger or healthy, they outperform even more yet. So with those markets stabilizing, we believe our growth factors led by our ProteinSimple franchise that can just spoke of our spatial biology franchise, we'll continue to take more market share and we'll get us from the, call it, flattish growth that we've -- if you take out the 2 customers, the flattish growth that we've had in the most recent quarter, and that we're expecting this next quarter to turn into low -- call it, low single-digit growth or so in the back half of the year. In addition to the fact, we got easier comps. We're going to be lapping the tough academic environment that started in February. We have -- our Diagnostics business has actually performed very well for us, around 10% or 15% of our business. It's been a mid- to high single-digit grower, even in this most recent quarter on a very tough comparables as well. More little lumpy business, these are diagnostics sell to large OEM instrument makers and laboratories, and they buy very lumpy once or twice a year. They happened to front-load their purchases last year, and we still grew on top of that. This year, those purchases appear to be more level loaded. So that is an easier comp as well in the second half. So a long way of saying, we will incrementally take share in a stabilizing market as the markets improve. We will have easier comps in the back half, which should allow us to be in the black as opposed to flattish or slightly in the red. And then hopefully, as we get into the back half of calendar 2026, the market's actually -- all 3 end markets start to improve, not just stabilize. It gets us back to a double-digit type entitlement.

Great. A lot of upside. Appreciate it. Well, we are out of time here. So apologies for not getting to Q&A, but thank you so much for sharing the story. Kim and Jim, great job.

Yes, thank you.